Tax Desk Book. PERU Estudio Olaechea

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1 Introduction Tax Desk Book PERU Estudio Olaechea CONTACT INFORMATION: Gustavo Lazo Sappinara Estudio Olaechea Bernardo Monteagudo 201 Lima 27 - Peru gustavolazo@esola.com.pe 1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.) Article 74 of the Peruvian Constitution of 1993 has established that all taxes have to be created, modified, or discharged by Law (or Legislative Decree when the corresponding powers have been delegated by the Legislative Branch to the Executive Branch). This premise is also applicable to tax exemptions. The Peruvian Tax regime is regulated by several statutes. The Tax Code is the main legislative body and regulates the tax principles, the nature of taxes, the tax system, and faculties of the Tax Administration, the Tax Court, the tax proceedings, the statute of limitations and the penalties that may be imposed to tax payers. Our legislation is composed of both direct and indirect taxes. The first group includes mainly income taxes. These are applied to companies, partnerships, limited liability companies, joint ventures, associations and foundations, as well as to individuals.

2 On the other hand, the applicable indirect taxes include the General Sales Tax,, which is the most important one, the excise tax, etc. Taxes also include the Financial Transactions Tax (ITF), the Temporary Tax on Net Assets (ITAN), Real State Property Tax and contributions to health care and pensions. INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS Calculation of Income/ Profit Taxes 2. How is the taxable base determined? In Peru, all resident taxpayers are taxed on their worldwide income, while nonresident taxpayers are taxed on their Peruvian source income. For resident business entities (companies, partnerships and any other form used to conduct business; also, resident partnerships, limited liability companies, taxable foundations and associations, as well as joint ventures keeping independent accounting from that of the venturers, will be subject to the same tax treatment) the taxable base is determined by taking the revenue and deducting all the expenses that the law allows them to, depending on the rules applicable to each case. For the determination of the taxable base of individuals, in their case, fixed percentages established by the Income Tax Law are deducted from the gross income of each of the categories referred to in question 9. In the case of non-resident taxpayers, the corresponding withholding taxes are applicable on the net income, as determined by law. 3. What revenues are included? As a general rule, all revenues obtained by a company stemming from its business activities are considered income for taxation purposes. They fall into the third category: trading and industry income and others expressed in the law. In the case of individuals, Peruvian source revenues may fall into the following categories: First category: income produced by leasing operations Second category: income from other capitals Fourth category: income from independent work

3 Fifth category: income from dependent work and income from independent work expressly stated by law. 4. What deductions are allowed? Companies may deduct from their gross income, all expenses incurred to produce income and/ or maintain its source, provided that are not expressly forbidden by law and certain conditions are met. Resident individuals are only allowed the following flat deductions: Capital Income (First and Second Category): 20% of total gross income. Fourth Category: 20% of total gross income, with a limit of 24 UIT (Tax Reference Unit). For year 2009, 1 UIT equals to S/. 3,550 (US$1,115.00, approximately). Additionally, in the case of individuals, a 7 UIT exemption can be applied to the sum of fourth and fifth category incomes. 5. What are the major expenses that are not deductible? The following are some expenses that may not be deducted from the gross income: Personal expenses; Income Taxes; Fines and any other tax sanctions; Certain donations; Amounts invested in the acquisition of goods or permanent improvements; Provisions or reserves whose deduction is not admitted by Law; Amortization of intellectual property, except for those with a limited lifetime; Commissions originated abroad for the purchase or sale of goods, in the part that exceeds the amount normally paid in the country in which they originate; General Sales and Excise Taxes levying gratuitous transfer of property; Expenses supported by invoices that do not fulfil the formal requirements stated in the Invoices Regulations; Expenses incurred in some operations connected with tax havens; Payments that are not carried out through one of the authorized mechanisms of the Financial Transaction Tax Law. In the case of individuals, no other deductions are allows apart from those described in our answer to question 10.

4 6. What are the applicable federal rates? There are no states, federal, regional or local income taxes. Taxation is applied on a national basis. Income tax is applied on a five-category basis. Business entities income (i.e. third Category income) is generally subject to a 30% tax. Income from individuals is classified into two categories: Capital Net Income (Income from first and second categories) and Work Net Income (Income from fourth and fifth categories and the foreign source income). The annual capital net income (not including dividends) is subject to a 6.25% rate. The annual work net income of resident individuals is subject to the following progressive cumulative scale: Work Net Income Rate Up to 27 UIT 15% More than 27 and up to 54 UIT 21% Over 54 UIT 30% Income obtained by non-resident individuals is subject to a 30% withholding tax. Dividends paid to resident, non resident individuals and non resident business entities will be subject to a 4.1% withholding tax rate. 7. What are the applicable state and/ or other local rates? There are no states, federal, regional or local income taxes. Taxation is applied on a national basis. 8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc? The income tax on capital gains obtained by resident business entities is also 30%, which is applicable on the capital gain only. The same is the case for non-resident business entities, although a procedure will have to be followed before the Tax Administration in order to certify the acquisition cost.

5 In the case of individuals, the capital gains obtained are part of the Capital Net Income and subject to a 6.25% tax. Currently, capital gains obtained by foreign individuals are subject to a 30% withholding on the gain only (a procedure will have to be followed before the Tax Administration in order to certify the acquisition cost). Starting 2010, the withholding will vary between 5% and 30%. The Income Tax Law states that in case of business reorganization (considered as either merger or demerger, the parties can choose one of the following regimes: If the companies agree the voluntary revaluation of the assets the difference between the greater agreed value and the cost determined by law will be subject of the Income Tax. In this case, the transferred goods, as well as those of the buyer, will have the value of the revaluation as the taxable cost. The difference stated in a) will not be taxed, as long as it is not distributed. In this case, the greater value from the revaluation will not have a tax effect: it will not be considered as a taxable cost of the goods or their depreciation. If there is no voluntary revaluation of the assets, the transferred goods of the buyer will have the same taxable cost that it would have had if still in the seller s hands, and only the fiscal adjustments due to inflation are included. 9. How are operating losses handled? Resident business entities may compensate their Peruvian source net losses by using one of the following systems: Carrying forward the total Peruvian source net loss obtained in a tax year for four (4) years, by applying these losses on a year-by-year basis to income obtained during the aforementioned term. Once this period expires, the remaining losses may not be compensated with profits. Carrying forward the total Peruvian source net loss obtained in a tax year by applying it on a year-by-year basis to 50% of the income obtained during the immediately subsequent tax years. Under this system losses may be carried forward for an indefinite period. Under both systems, the exempt income will be considered in order to determine the compensable net loss. If the taxpayer does not choose one of the above-mentioned systems, the Tax Administration will apply the first system. No loss carry-backs are allowed. In the case of individuals, no losses may be deducted or carried forward.

6 10. How are capital losses handled? Please refer to the previous question. Territorial Rules 11. What are the residence rules? For taxation purposes, business entities will be deemed resident in Peru if they have been incorporated in the country. Peruvian nationals are also considered to be resident individuals for tax effects. Foreign nationals will be considered as resident individuals if they stay in Peru for more than 183 days in a twelve month period. 12. Is worldwide income taxed? Resident business entities and individuals are subject to income taxation on their worldwide income. However, non-resident business entities and individuals are levied only on their Peruvian source income. 13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others? In order to avoid international double taxation, resident business entities and individuals may credit against the Peruvian Income Tax the amounts levied by the source country. However, the amount that may be credited is subject to certain statutory limitations. Withholding Taxes 14. What are the rates on dividends for withholding taxes? Dividends paid to non-resident business entities and individuals are subject to a 4.1% withholding tax. Dividends payable to resident business entities are tax-exempt until they are subsequently distributed to individuals (either resident or non resident) or non-resident business entities.

7 15. What are the rates on royalties for withholding taxes? The withholding tax rate on royalties is 30%. 16. What are the rates on interest for withholding taxes? Interests from financing granted by non-resident business entities are subject to a withholding tax rate of 4.99% provided several requirements are met; otherwise, a withholding tax rate of 30% will apply. In order to benefit from the 4.99% rate parties may not be related. On the other hand, interest payable by resident banks, financial entities and other multiple operation entities to non resident entities as a result of the utilization in the country of their credit lines abroad will be subject to a withholding tax rate of 1%. Interests paid to non-resident individuals are subject to a 30% withholding. 17. What are the rates of withholding tax on profits realized by a foreign corporation? As a general rule, Peruvian source income obtained by non-resident business entities is subject to a withholding tax of 30%. Notwithstanding, dividends and any other kind of profit distribution agreed in favour of non-residents are subject to a withholding tax of 4.1%. 18. Please list any other rates on withholding taxes that we should be aware of. In order to determine the Peruvian source net income regarding the transfer of goods or rights, non resident taxpayers may deduct the cost incurred in their acquisition, provided certain requirements are complied with. Likewise, in regard to the exploitation of goods that may be depreciated, non resident taxpayers may deduct up to 20% of the amount paid or credited. Due to their international nature, several activities performed by non-resident business entities (and their permanent establishments) are deemed to generate different percentages of Peruvian source net income. The effective tax rate is obtained in those cases by applying the corresponding withholding tax rate to the percentage of said income considered of a Peruvian source.

8 As a general rule services rendered abroad are not subject to withholding taxes in Peru. However, non-resident business entities which render technical assistance services will be subject to a 15% withholding tax provided several requirements are met, irrespective on where the service is rendered. Also, digital services used in Peru are subject to a 30% withholding irrespective on where they are rendered. Tax Returns and Compliance 19. What is the taxable reporting period? For income tax purposes, the Peruvian fiscal period runs from the 1st of January until the 31st of December. The tax return must be filed with the Tax Administration (SUNAT) on an annual basis. 20. What are the due dates for the filing of tax returns? Resident business entities and individuals must file an Annual Income Tax Return during late March or early April, assessing the Income Tax corresponding to the prior tax year (which closes on December 31st). The filing dates will be published by the Tax Administration and will depend on the last digit of each taxpayer s Registry Number (RUC). Taxes must be paid upon the filing of the tax return. Similarly, business entities must make Income Tax advanced payments on a monthly basis. Said payments should be made in accordance to the schedule to be published by the Tax Administration (also based on the last digit of the RUC). Likewise, individuals earning income that classifies into the first category (i.e. from lease operations) must make Income Tax monthly advance payments and file the corresponding tax return according to a given schedule. Individuals earning income that classifies into the fourth category (i.e. from independent work) must also make monthly advance payments provided their payers do not withhold the tax. Those who pay to individual s income that classifies into second category income (i.e. income from capital) or fifth category income (i.e. from dependant work) must withhold the corresponding taxes. Individuals obtaining only fifth Category income are not required to file an Annual Tax Return.

9 21. What are the key compliance requirements? If possible, all taxpayers shall file their Tax Returns online, by using a special program prepared by the Tax Administration for each particular case. Particular attention must be paid in the case of filling in the forms, avoiding leaving blank spaces. 22. Are there any other requirements that we should be aware of regarding tax returns and compliance? The Transfer Pricing Regime established in the Income Tax Law and Regulations has disposed that the following formal obligations must be complied with: (i) Annually present an informative affidavit of the transactions carried with related parties. The said affidavit shall only be presented if the amount of the operations carried out with related parties exceeds S/ (approx. US$71,500), according to paragraph a) of article 3º of Superintendence Resolution No /SUNAT. However, the said affidavit shall always be presented if operations with entities that are resident of tax havens are carried out. (ii) Keep detailed documentation and information of each transaction, when applicable, that supports the calculation of the transfer prices, the methodology used and the criteria taken under consideration by the taxpayer that shows that the income, expenses, costs and losses have been obtained in accordance to the prices and utility margins that would have been used by independent parties in comparable transactions, duly translated to Spanish, if necessary, during the corresponding statute of limitations period of the tax obligation. (iii)have a Transfer Pricing Technical Study that supports the calculation of the transfer prices and, consequently, the value assigned to the operations performed with related parties. This will only apply if the income accrued during the fiscal year exceeds the amount of S/.6, (approx. US$2,143,000) and, additionally, if the amount operations with related parties exceeds the amount of S/.1, (approx. US$357,000). However, the said Technical Study must be prepared if operations with entities that are resident in tax havens are carried out.

10 INDIRECT TAXES 23. Are there any indirect taxes in your jurisdiction? Yes. The General Sales Tax (IGV) and the Excise Tax are the indirect taxes which exist in our jurisdiction. 24. How does it operate? Is it a VAT or a sales tax? The General Sales Tax (IGV) is the Peruvian version of a value added tax. It levies (1) the sale of goods in the country; (2) the rendering or utilization of services in the country; (3) construction contracts; (4) the first sale of real estate property performed by the constructor; and (5) the importation of goods. The current IGV rate is 19%. Although the tax will be applied on each level of the commercialization chain, it is designed to transfer to the final consumer its economic burden. The excise tax is applied on fuels (gas, gas-oils, and diesel), alcoholic beverages, cigarettes and tobacco, vehicles, gassed drinks including mineral water, gambling, chance and lottery games, raffles and other related activities. Tax rates are variable and for some items this tax is applied by charging a fix amount per unit sold. 25. How is the taxable base determined? In order to assess the corresponding IGV Tax due, the taxpayer will have to deduct from the monthly gross tax the IGV Tax credit. The gross tax of each levied transaction will be the amount resulting from the application of the IGV Tax rate (19%) on the amounts received by the taxpayer for any transaction subject to this tax. The addition of all the gross taxes corresponding to the levied transactions on a monthly tax period will be the gross tax of said tax period. The tax credit is the tax separately assigned in the invoices that supports the acquisition of goods, services and construction contracts, or the payment for the importation of goods or for the utilization in the country of services rendered by non residents. To have the right to the tax credit, the transactions (1) should be allowed as costs or expenses of the company in accordance to the Income Tax legislation, even if the taxpayer is not levied by said tax; (2) representation expenses have a special procedure in the regulation law (3) should be destined to transactions for which the IGV Tax should be paid. In addition, certain formal requisites

11 The excise tax is calculated in the same way. 26. What are the applicable rates? The General Sales Tax rate is 19%. The excise tax rates are variable and for some items this tax is applied by charging a fix amount per unit sold. 27. Are there any exemptions? Several goods and services are exempted from the IGV. Also, services which are considered to be exported are also exempted, provided several requirements are met. 28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction? A temporary Financial Transactions Tax (ITF) has been created to levy a series of financial transactions made through the Peruvian banking system, irrespective of the amount. The ITF paid may be credited against the Income Tax. During 2009 the rate is 0.06% and during 2010, will be 0.05%. PARAFISCAL CONTRIBUTIONS 29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)? Affiliates to the National Pension System must pay a contribution to the National Pension System. On the other hand, those individuals affiliated to the Private Pension System must pay a contribution that will depend on the Private Pension Entity (AFP) elected. 30. How do they operate? The contribution is monthly.

12 31. How is the taxable base determined? The taxable base is the monthly retribution earned. In this case, the monthly retribution comprehends all concepts which are considered to be part of the said retribution according to the labour legislation. 32. What are the applicable rates? The National Pension System s contribution is of 13%. The contribution to the Private Pension System depends on the Private Pension Entity (AFP) elected (the current average is 12.8%). 33. Are there any exemptions? There are no exemptions. INHERITANCE AND GIFT TAXES 34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.? No 35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base. N/A OTHER MATTERS 36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.? Yes

13 37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti- Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules The Peruvian Income Tax Law has established a Transfer Pricing Regime. In that sense, please note that According to article 32º-A of the ITL, the transactions carried out between related entities will be considered to have been agreed with the prices and retributions that would have been agreed on with or among independent parties in comparable transactions, with the same or similar conditions. In this sense, the transfer prices shall be determined according to an internationally accepted method, several of which are contained in the ITL, which is more appropriate to reflect the economic reality of the operation (comparable uncontrolled price method, resale price method, plus cost method, transactional net margin method and profit split method). If the costs or expenses made exceed (or are inferior) to the transfer prices determined according to the appropriate method, the Tax Administration will proceed to adjust them. In certain cases, the transfer prices determined shall also be applied in relation to the Value Added Tax. On the other hand, paragraph a) of article 37º of the Income Tax Law and part 6) of paragraph a) of article 21º have established thin capitalization rules. Therefore, resident business entities which pay interests to economically related parties may only deduct them provided that the total debt with said economically related parties does not exceed in three times the resident business entity s net worth. The interests corresponding to the part which exceed the said amount will not be deductible. 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed. Peru has entered into Double Taxation Avoidance Agreements (hereinafter, DTAA) with Chile and Canada. According to the said agreements, all the Peruvian source business profits obtained by a Chilean or Canadian resident entity can only be taxed in Chile or Canada, correspondingly, unless the said entities construe a permanent establishment (hereinafter, PE) in Peru. Nonetheless, interests, dividends and royalties have reduced withholding rates. In the case of both DTAA the said rates are 10% or 15% for dividends (in this case, the

14 lower Peruvian Income Tax Law rate of 4.1% will apply), 15% for interests (in this case, the lower Peruvian Income Tax Law rate of 4.99% will apply provided that the requirements are complied with and the loan is not carried out between related parties) and 15% for royalties. Notwithstanding, the said passive income (interests, dividends and royalties) will also be subject to taxation in Chile or Canada, accordingly, being that the Income Tax paid in Peru could be used as tax credit. Additionally, Peru has signed DTAA with Brazil and Spain, which are still pending ratification. Finally, it is worth noting that the Decision No.578 of the Community of Andean Nations, which regulates the regime to avoid double taxation and prevent fiscal evasion between the members of the said organization (Bolivia, Ecuador, Colombia and Peru), is also in force.